18 Feb 2016

Stopping monopoly pricing - not the goal of Part IIIA of the Competition and Consumer Act

by Paul Burton, Michael Corrigan

The NCC, and ultimately the Minister, did not accept that there was a functionally distinct, dependent market for the financing of coal mining projects in the Hunter Valley.

The charging of excessive or monopoly prices by a firm has often been seen as warranting the intervention of the competition regulator, the ACCC (where such conduct involves the firm misusing its market power [1] , or the declaration of the services by the designated Minister under Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA) (where access to an essential infrastructure service is concerned).

However, a recent decision by the Acting Treasurer to not declare the shipping channel service at the Port of Newcastle is a timely reminder that Part IIIA of the CCA is not of itself a panacea to curb the pricing conduct of infrastructure service providers, even monopolists.

Privatisation of Port of Newcastle

In May 2014 the New South Wales State Government entered into a long-term lease of the assets of the Port of Newcastle, including the shipping channels. Port of Newcastle Operations Pty Limited (PNO) assumed responsibility for the functions at the Port that were previously performed by the Port Authority of New South Wales. PNO's ability to charge users for use of the Port's shipping channels was derived from the provisions of the Ports and Maritime Administration Act 1995 (NSW).

Application for declaration

On 13 May 2015 Glencore Coal Pty Ltd applied for the declaration of the shipping channel service at the Port of Newcastle under Part IIIA of the CCA. The relevant service was described as comprising "the provision of the right to access and use the shipping channels (including berths next to the wharves as part of the channels) at the Port, by virtue of which vessels may enter a Port precinct and load and unload at relevant terminals located within the Port precinct, and then depart the Port precinct".

Glencore's apparent motivation in applying for declaration of the shipping channel service was that following the privatisation of the Port of Newcastle, PNO as the new private owner had from 1 January 2015 instituted price increases and changes to the charging regime such that an average 40% price increase was imposed on the users of the shipping channels and the price for the most common vessel type using the shipping channels increased by 60%.

NCC recommendation

On 2 November 2015 the National Competition Council (NCC) published its final recommendation in which it recommended that the service not be declared because it was not satisfied that criterion (a) (this criterion requires an applicant to demonstrate that access (or increased access) to the service would promotion a material increase in competition in an upstream or downstream market) was satisfied. The Acting Treasurer, as the designated Minister, agreed and on 8 January 2016 decided not to declare the shipping channel service.

In its final recommendation the NCC expressly noted that:

"Declaration under the National Access Regime is not a mechanism for imposition of price regulation and was never intended to be such. 'Excessive', 'monopolistic' or 'gouging' pricing per se is not the focus of Part IIIA. Where such pricing in one market merely transfers income or value from one party in a supply chain to another without materially impacting competition in any other market, Part IIIA does not provide a remedy. The focus of the Regime is on promotion of competition in markets where the lack or restriction of access to infrastructure services provided by facilities that cannot be economically duplicated would otherwise limit competition.

Not all, indeed possibly only a small subset of, price disputes or situations where prices may appear to be 'excessive', 'monopolistic' or 'gouging' will fall within the ambit of Part IIIA. The declaration criteria, in particular criteria (a) and (b), limit the ambit of the National Access Regime to situations where services are provided by facilities that are uneconomic to duplicate and where the price or other terms and conditions of access are such that competition is restricted in a market other than the market for the infrastructure service."

Rather, Part IIIA of the CCA is concerned with the way in which high prices (or other conduct) may affect competition in a dependent market. On this basis, the NCC considered that its role was to consider the ability and incentive of PNO to exert market power to adversely affect competition in a dependent market and to consider whether increased access to the shipping channel service would promote a material increase in competition in any identified dependent market.

Conclusion on criterion (a)

In its application for declaration, Glencore claimed the existence of a number of markets that were dependent on the shipping channel service in respect of which competition would be materially increased, including:

  • coal export market;
  • coal mining project financing market;
  • exploration and/or mining authorities acquisition and disposal market;
  • mining operations infrastructure services market;
  • geological and drilling services, construction, operation and maintenance market; and
  • shipping services market.

The NCC accepted that all but one of these markets were separate dependent markets. The NCC, and ultimately the Minister, did not accept that there was a functionally distinct, dependent market for the financing of coal mining projects in the Hunter Valley.

In assessing whether criterion (a) had been satisfied in this case, the NCC concluded that it had not been satisfied. The NCC opined that criterion (a) would not be met by simply establishing that a service provider was a bottleneck monopoly or possessed market power.

What was critical to the NCC was the fact that notwithstanding the increases imposed by PNO in the shipping access charges, the port charges applying at the Port comprised approximately less than 1% of the total delivered cost of coal. Consequently, the NCC failed to see how such a small proportion of the total costs would make a material difference to the cost profile of a coal producer so as to have an impact on competition in any of the identified dependent markets.

The NCC also concluded that as a number of the identified dependent markets were likely to already be effectively competitive, then based on the Australian Competition Tribunal's decision in Re Fortescue Metals Group Ltd, such a conclusion brought to an end the inquiry as to the satisfaction of criterion (a). The Minister agreed with the NCC's conclusions. 

The NCC's assessment in this case can be contrasted with the earlier Sydney Airport case where Virgin Blue (as it was then known) successfully sought declaration of the airside services provided by Sydney Airport Corporation Ltd (SACL) at Sydney Airport on the basis of the imposition of a new charging regime. In that case it was held that the change by SACL in its domestic airside service charges from a maximum take-off weight to passenger-based charges had the effect of discriminating in favour of the full service airlines (ie. Qantas) and against the low cost carriers (ie. Virgin) thereby resulting in a softening of competition in the airline services market. Consequently, it was held by the Tribunal (and by the Federal Court on appeal) that increased access to the airside services would promote competition in the domestic air passenger market. [2]

What are the ramifications of the Minister's decision?

What this decision means is that any assessment of an access provider's access charges will be assessed through the rubric of criterion (a). It will not be enough for a declaration applicant to simply show that the access provider has increased prices or has an ability to do so. Rather, it will be necessary for an applicant to satisfy the NCC (and then the designated Minister) that access (or increased access) would promote a material increase in competition in at least one dependent market.

Where there already is effective competition in the dependent market/s, it will be difficult for an applicant to satisfy criterion (a).

On 29 January 2016 Glencore filed an application for review of the Acting Treasurer's decision. That review will be a merits based review of the Acting Treasurer's decision before the Australian Competition Tribunal. So for now, watch this space.

[1]The charging of excessive or monopoly prices alone will rarely, if ever, constitute the misuse by a firm of its market power in contravention of section 46 of the CCA.Back to article

[2]The materiality requirement in respect of criterion (a) was inserted subsequent to the Virgin case. Back to article

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.